Pivotal Events

Base Metal Prices were likely to top shortly after gold and silver and it was
simultaneous.

Our index, less nickel, fell 23.7% from 779 on May 11 to 594 on June 20.

Last week's edition was looking for a rebound to test the highs and, so far,
the index has made it to 615.

While the action until May had the signature of a cyclical blowoff, which
explains the size of the initial plunge, the test of the high will determine
whether a cyclical bear follows or not.

A couple of things suggest a melancholy outcome. The yield curve has inverted,
from which the rule is that a recession follows.

The next item is that the stock market is technically very weak and, as everyone
knows, the stock market leads the economy.

Another indicator is that our Peak Momentum Indicator, which only registers
at close to the top of a huge speculation, has given the biggest signal since
1998.

Of course, the biggest indicator of a peak is the takeover mania, with Phelps
Dodge coming into the nickel play. They could take on some $22 billion in debt
to do the deal.

In 1980, the Secretary of Energy stated "One thing is for certain, [crude]
prices will continue to rise ... traditional criteria of supply
and demand don't apply.", which meant that crude oil was beyond market forces. Naturally, "Big
Oil" applied this reasoning to the hitherto cyclical base metals and started
the acquisitions.

One that is recalled, and quite likely not in perfect detail, involved Amax
Inc., which was the biggest producer of molybdenum. The company then was the
equivalent in molybdenum to what Inco was once in nickel.

The offer was around $80 and Amax management advised shareholders that the
company was worth a lot more. On that play, moly went from about $6.50 per
pound to $30.

Amax and Placer thought they had control of the market and held the price
too high for too long. The steel companies pushed out the high strength light
alloy steel and the price of molybdenum fell to around $2.50.

From around $80, Amax stock plunged to $10, indicating that metals, earnings,
and mining shares were still cyclical.

Ironically enough, Amax became Cyprus Amax and was acquired by Phelps Dodge
in 1999.

Perhaps the word cyclical means "what goes around comes around".

Odds are it has been a cyclical peak and the summer's action will likely
confirm that history has recorded a fabulously speculative peak.

Rallies should be used by investors, producers, and traders to get defensive.

Golds: Using the key indexes, gold stocks are likely to rally for about 4
months. This style of bottoming pattern is usually followed by gains ranging
from 28% to 40%.

A few weeks ago, the advice was to accumulate going into the bottoming pattern
and last week's advice was to aggressively buy.

Gold's nominal price has been recovering from the 562.5 low, but the real
price has been declining, which indicates that costs are still going against
the producers.

One proxy for this is our gold/commodities index (chart follows), which has
declined from 242 in January to yesterday's 203. This rally in gold will likely
be inspired by the rebound in base metal and energy prices, so it won't be "real".

What is needed for "real" is straightforward. Gold's real price always
declines in a boom and increases in the consequent contraction. Associated
with this is that credit spreads widen, which has been moderate. The other
financial item is a steepening yield curve and the latest on this is that the
latest curve flattening took the 10s to 2s to -5 bps on June 4, which was also
the low for gold.

Although only modest, the couple of ticks of steepening since is a plus for
gold's nominal price, so today's pop is within the appropriate credit market
conditions.

When gold is weak, we still see worries that the central bank cartel is rigging
the market down.

As history shows, there can be a world of difference between policy ambition
and policy result.

One example is when the U.S. went on the two-tiered price system for gold.
On this idiotic scheme, the official price was $35 and the other was a constantly
changing market price, which was higher.

Then the Treasury Secretary, Henry Fowler, was a strong supporter and, as
Barron's reported on May 27, 1968: "The 'two-tiered' system, so the
master craftsman recently boasted about his handiwork, will endure for decades.
Frederick Deming, Under Secretary of the Treasury, outdid his boss by predicting
that it would last 'until hell freezes over'."

- Sure !!

GOLD'S REAL PRICE( RELATIVE TO COMMODITIES )

Note the highs with the contraction that bottomed in 4Q 2002 to
1Q 2003.

Volatility is obvious, but the point is to have a key low as a boom
in stocks, corporate bonds, and commodities completes.

The opinions in this report are solely those of the author.
The information herein was obtained from various sources; however we do not
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